Dominic Oliveira was an independent contractor (owner-operator) of New Prime Inc., an interstate trucking company. Oliveira’s operating agreement contained a mandatory arbitration provision, which included a delegation clause allowing the arbitrator to decide whether a dispute is subject to arbitration.

Oliveira brought a FLSA class action, alleging he and other drivers were owed wages. New Prime sought to compel arbitration. Oliveira argued the court lacked authority to compel arbitration because of the FAA’s § 1 exception for “contracts of employment” with certain transportation workers.

New Prime argued, first, that the question of § 1’s applicability was for the arbitrator to decide due to the arbitration agreement’s delegation clause. Second, New Prime argued the language in § 1, “contracts of employment,” only refers to contracts involving an employer-employee relationship. Thus, New Prime argued, § 1’s exception does not apply to independent contractor agreements, and these can still be subject to arbitration.

SCOTUS’s Decision

The Supreme Court unanimously held in favor of Oliveira. (8-0, with Justice Kavanaugh recused.)

First, the Court held a court, not an arbitrator, should determine whether a § 1 exclusion applies before it can compel arbitration. This is because §§ 1 and 2 of the FAA limit the scope of the Court’s powers under §§ 3 and 4 to stay litigation and compel arbitration. Section 2 provides the FAA applies only when the parties’ agreement to arbitrate is set forth in a “written provision in…a contract evidencing a transaction involving commerce.” Section 1 defines § 2’s terms, and states “nothing” in the FAA “shall apply” to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” In short, if a contract falls within § 1, the FAA does not apply.

The Court also held the delegation clause in Oliveira’s agreement did not change anything, because a delegation clause is “merely a specialized type of arbitration agreement,” and the FAA applies to it the same as any other arbitration agreement. Therefore, the Court held, a court may use §§ 3 and 4 to enforce a delegation clause only if the contract does not first trigger § 1’s exception.

Second, the Court held the term “contract of employment” in § 1 refers broadly to any agreement to perform work, and is not limited to employee-employer relationships. The Court relied on the meaning of the phrase “contract of employment” at the time Congress passed the FAA. At the time, “contract of employment” was not a term of art, but only referred to work generally. Additionally, there was no dispute that Oliveira, as an owner-operator, qualified as a “worker engaged in…interstate commerce.” Therefore, Oliveira’s agreement was excepted from the FAA under § 1.

Impact of New Prime

Going forward, the New Prime decision calls into question whether arbitration agreements in owner-operator agreements can be enforced by a court, and whether independent contractor drivers can be required to arbitrate claims.

]]>https://www.laboremploymentlawblog.com/2019/01/articles/arbitration-agreements/new-prime-independent-contractor-truck-drivers/feed/0U.S. Supreme Court Rejects ‘Wholly Groundless’ Exception to Delegation Clauses in Arbitration Agreementshttps://www.laboremploymentlawblog.com/2019/01/articles/arbitration-agreements/supreme-court-rejects-exception-delegation-clauses/
https://www.laboremploymentlawblog.com/2019/01/articles/arbitration-agreements/supreme-court-rejects-exception-delegation-clauses/#respondThu, 10 Jan 2019 19:58:55 +0000https://www.laboremploymentlawblog.com/?p=3377Continue Reading]]>On January 8, 2019, the United States Supreme Court issued a unanimous opinion in Henry Schein, Inc. v. Archer & White Sales, Inc. strengthening the enforceability of arbitration “delegation clauses.” These clauses have been previously upheld by the U.S. Supreme Court and allow parties to agree that an arbitrator, rather than a court, will decide the threshold issue of whether a dispute must be arbitrated, as well as the merits of the dispute. The Supreme Court in Henry Schein rejected a doctrine adopted by several federal Circuit Courts of Appeals and the California Court of Appeal, which permitted courts to decline to enforce delegation clauses if the underlying assertion of arbitrability was “wholly groundless.” Under Henry Schein, courts must refer questions of arbitrability to the arbitrator when the parties have agreed to a clear and unmistakable delegation, even if the court believes the claim of arbitrability is frivolous.

Lower Court Proceedings

In Henry Schein, the parties entered into an arbitration agreement that incorporated the rules of the American Arbitration Association. These rules give the arbitrator the power to decide his or her own jurisdiction, so Henry Schein contended that the incorporation of the rules constituted a delegation clause. The district court and Fifth Circuit Court of Appeals refused to delegate the question of whether the parties’ substantive dispute was arbitrable to an arbitrator based on a finding that Henry Schein’s argument for arbitration was “wholly groundless.”

The FAA Does Not Include A “Wholly Groundless” Exception For Delegation Clauses

The U.S. Supreme Court unanimously reversed the Fifth Circuit, finding that a “wholly groundless” exception to the enforceability of delegation clauses is “inconsistent with the text of the [Federal Arbitration Act] and with our precedent.” The high court held that it must interpret the Federal Arbitration Act as written, which in turn requires courts to interpret arbitration agreements as written. If the contract delegates arbitrability questions to an arbitrator, a court may not override the contract simply because it believes the questions are obvious. The Supreme Court previously held in AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 649–650 (1986) that a court may not “rule on the potential merits of the underlying” claim that is assigned by contract to an arbitrator, “even if it appears to the court to be frivolous.” The Court in Henry Schein held that this same principle applies when the issue assigned by contract to an arbitrator is the arbitrability of a party’s underlying substantive claims.

Public Policy Considerations

Archer & White, the party opposing arbitration, argued that it would be a waste of time and money to send the arbitrability question to an arbitrator if the argument for arbitration is wholly groundless. But the Supreme Court refused to create an exception to the Federal Arbitration Act that was not included in the statutory text. Further, the Court held that recognizing such an exception would spur “a time-consuming sideshow” of collateral litigation regarding when an argument is wholly groundless, as opposed to merely groundless. The Court also noted that while a court may find the answer to arbitrability questions obvious, an arbitrator might hold a different view and that the parties’ choice to have the arbitrator decide must be respected. The Court held that if a demand for arbitration is truly frivolous, the arbitrator can quickly dispose of the matter and may be able to impose fee and cost-shifting sanctions in proper circumstances.

Court Limits Its Holding To The “Wholly Groundless” Exception

The Supreme Court expressly did not decide whether incorporation of the American Arbitration Association rules is by itself an effective clear and unmistakable delegation clause. This issue has divided some courts, particularly where one of the parties is an unsophisticated individual. The Court in Henry Schein made clear that its holding was limited to the validity of the “wholly groundless” exception.

Takeaways

Ultimately, Henry Schein provides further support for the enforceability of delegation clauses in arbitration agreements. It solidifies employers’ and employees’ right to contract to have arbitrators decide not only the merits of their disputes, but also the question of whether such disputes are arbitrable. Because Henry Schein is an interpretation of section 2 of the FAA, which governs arbitration agreements affecting interstate commerce—including those used in most employment agreements, it should be binding in both state and federal court. The opinion is therefore relevant to most employers and will affect litigation involving arbitration agreements, and delegation clauses specifically, at both the federal and state level. While Henry Schein answered the particularly narrow question regarding the validity of the “wholly groundless” exception previously recognized by some circuits and California courts, the U.S. Supreme Court’s opinions in two other arbitration cases, Lamps Plus v. Varela and New Prime Inc. v. Oliveira, should shed some further light on the current Court’s views on arbitration.

]]>https://www.laboremploymentlawblog.com/2019/01/articles/arbitration-agreements/supreme-court-rejects-exception-delegation-clauses/feed/0Supreme Court Deems Public-Sector Union Agency Fees Unconstitutionalhttps://www.laboremploymentlawblog.com/2018/06/articles/scotus/public-sector-union-agency-fees-unconstitutional/
https://www.laboremploymentlawblog.com/2018/06/articles/scotus/public-sector-union-agency-fees-unconstitutional/#respondThu, 28 Jun 2018 21:46:01 +0000https://www.laboremploymentlawblog.com/?p=3283Continue Reading]]>On June 27, 2018, the United States Supreme Court ruled that mandated payment of so-called “agency fees” by non-union members in the public sector violated First Amendment principles protecting freedom of speech and association. In Janus v. American Federation of State, County and Municipal Employees Council 31, No. 16-1466, 2018 WL 3129785 (June 27, 2018) a 5-4 majority of the Court rejected the holding of the 1977 case Abood v. Detroit Board of Education, 431 U.S. 209 (1977), which permitted such fees, as a wrongly-decided imposition on individual constitutional rights. This landmark decision presents major implications for public-sector union funding in the future, and is notable for all employers with unionized workforces.

Before Janus, public-sector unions in states without “right-to-work” legislation were permitted to charge employees who were members of the bargaining unit, but not members of the union, a percentage of standard union dues labeled “agency fees.”[1] However, a public-sector union collecting agency fees was only permitted to use such fees for purposes “germane” to the union’s collective bargaining activities, and not for political purposes such as lobbying for certain legislation or supporting a preferred political candidate. This division was supported by the Court’s decision in Abood, which ruled that the collection of agency fees in this manner was permissible and necessary both to promote labor peace and to avoid “free riders” – that is, bargaining unit members who benefitted from the union’s collective bargaining activities, but made no financial contribution to support it. In 2014, the Court rejected Abood and compelled agency fees with respect to private-sector unions in Harris v. Quinn, 134 S. Ct. 2618 (2014); however, the issue of agency fees for public-sector unions had, until now, remained outstanding.

Mark Janus, the plaintiff in Janus, worked as a child support specialist for the Illinois Department of Healthcare Services, a position that was part of a bargaining unit represented by the American Federation of State, County and Municipal Employees, Council 31 (the “Union”). In accordance with Illinois law (the “Illinois Law”), the Union collected approximately $535 per year from Janus in the form of agency fees, which constituted 78.06% of full union dues. Janus challenged the constitutionality of the Illinois Law, arguing that his legally-required agency fees actually subsidized political speech. Specifically, Janus argued that even though his agency fees were nominally intended to fund activities that were “germane” to the Union’s collective bargaining actives, the Union inevitably engaged in political speech during the collective bargaining process, including taking politically motivated stances on employment and health care law. Thus, Janus contended, he was improperly compelled to fund the Union’s political speech through his agency fee contribution. Lower reviewing courts rejected Janus’ First Amendment arguments, ruling that Abood controlled the outcome of the case.

In an opinion authored by Justice Samuel Alito, the Supreme Court agreed with Janus’ position, overruled Abood, and ruled that public-sector agency fees are unconstitutional for several reasons. Perhaps most notably, the Court concluded that agency fees subsidize speech, even when they are only designated for collective bargaining activities. Speech made and union positions taken as part of the collective bargaining process, the Court remarked, address a variety of politically important matters “of profound value and concern to the public,” including “education, child welfare, healthcare, and minority rights.” Because political speech and the collective bargaining process are inextricably linked, the Court held, compelled agency fees are the equivalent of “compelling a person to subsidize the speech of other private speakers.”

The Court also rejected the Union’s reliance on the “free rider” arguments underpinning the Abood decision. As an initial matter, the Court noted that unions receive many benefits from a designation of “exclusive representative” that outweigh any burden imposed by representing non-members, including “a privileged place in negotiations over wages, benefits and working conditions” and “special privileges,” including information about employees and automatic deduction of dues and fees from members. Moreover, the Court reasoned that activities that might be deemed burdensome, such as representing non-members during grievance proceedings, could be resolved through less restrictive means than compelled agency fees, including requiring non-members to individually pay for representation in the event of a grievance.

As a result of the Court’s decision in Janus, public-sector employees – including teachers, police officers and transit workers – are no longer required to pay agency fees if they wish to avoid doing so. The impact on public-sector union organization and effectiveness in light of the ruling remains to be seen. We will continue to monitor the impact of Janus and provide additional information as it becomes available.

[1] “Right-to-work” states prohibit unions from collecting agency fees in the manner at issue in Janus.

The decision resolved an issue that had divided the Circuits, with the Court reversing the decisions of the 7th and 9th Circuits that had held that the NLRA rendered any sort of collective litigation waiver in an employment arbitration agreement unenforceable.

In its decision, the Court recognized the policy underlying the FAA and its requirement that courts enforce arbitration agreements according to their terms. Although the FAA contains a “savings clause” which invalidates arbitration agreements insofar as they conflict with other laws, the Court held that employees’ right to engage in “concerted activities” as guaranteed by the NLRA presents no such conflict. The Court noted that as a matter of statutory interpretation, statutes are to be read in harmony with one another, and conflicts arise only when they are explicit. A statute will not be displaced by another, absent a showing of a clearly expressed congressional intention to do so.

The Court declined to find such a conflict here. Although the NLRA protects “concerted activities,” the Court held that this protection is meant to encompass activities of a sort that “employees do for themselves in the course of exercising their right to free association in the workplace,” – it does not, as the employees argued, protect employees’ right to “the highly regulated, courtroom-bound ‘activities’ of class and joint litigation.” The Court also noted that while the NLRA provides a regulatory scheme for activities related to organization and collective bargaining, it is notably silent as to class or collective actions.

The Court bolstered its conclusion by relying on the Court’s treatment of other federal laws in relation to the FAA. In particular, the Court made reference to precedent holding that the Fair Labor Standards Act (“FLSA”), which specifically allows for collective suits for wages, does not invalidate arbitration agreements containing class action waivers. The Court reasoned that if the FLSA allows class action waivers for wage and hour disputes, certainly the NLRA, which regulates a completely different sphere, does not invalidate them. The Court went on to note that the Court has routinely declined to find a conflict between the FAA and other federal statutes, and it refused to find reason to reverse that line of reasoning with respect to the NLRA.

Finally, the majority rejected the argument that the National Labor Relations Board’s (“NLRB”) interpretation of the NLRA is entitled to Chevron deference. Although agency interpretations may be entitled to deference with regard to statutes it administers, such deference does not extend to their interpretations of other federal statutes it does not administer. The Court reasoned that allowing the NLRB to limit the FAA under the guise of interpreting the scope of the NLRA would essentially be “bootstrapping” the NLRB into an area which it has no jurisdiction.

The decision is a welcome development for employers hoping to avoid defending against burdensome and costly wage and hour class action suits. Employers should consult with legal counsel to ensure that their arbitration agreements contain valid and enforceable class action waivers.